C.I.T.-II, TIRUCHIRAPALLI vs. CITY UNION BANK LTD

C.A. No.-002690-002690 - 2006Supreme Court13 October 20082 pages
For Petitioner: B. V. BALARAM DASFor Respondent: REVATHY RAGHAVAN
AI SummaryRemanded

What were the facts?

The Commissioner of Income Tax, Tiruchirapalli (Revenue) appealed against the Madras High Court's judgment, which upheld the Income Tax Appellate Tribunal's decision. The Tribunal had ruled that interest earned by City Union Bank Ltd. (Assessee) on government securities was not taxable under Section 2(7) of the Interest Tax Act, 1974. The Revenue contended that interest on securities, including bonds and debentures, should be considered 'Interest chargeable to tax' under Section 2(7) of the Interest Act. The Assessee supported the High Court's decision. A similar issue was decided by the Supreme Court in Commissioner of Income Tax v. Corporation Bank, where it was held that interest on dated government securities was not taxable under the Interest Tax Act. The Revenue argued this decision applied only to government securities, while the Assessee stated the interest in this case was also on government securities. The Supreme Court directed the Tribunal to examine the factual position.

What did the Supreme Court hold?

The Supreme Court noted that a similar issue regarding interest earned by banks on dated government securities was considered in Commissioner of Income Tax v. Corporation Bank. In that case, the Court held that there is a fundamental distinction between loans and advances on one hand, and investments/securities on the other, as indicated in various Acts. The Court agreed with the Bombay High Court's view in Discount and Finance House of India Ltd. v. S.K. Bhardwaj, CIT and CIT v. United Western Bank Ltd., which the revenue had accepted. The Supreme Court observed that if the interest in the present case was indeed on government securities, the ratio of the Corporation Bank decision would apply. However, if the interest was not solely on government securities, the ratio would not be applicable. The Court directed the Tribunal to examine the factual position regarding the nature of the securities on which the interest was earned. The appeal was disposed of based on this factual determination.

What were the issues?

1. Whether interest earned by the assessee bank on government securities is liable to be assessed under Section 2(7) of the Interest Tax Act, 1974? (Question of law turning on Section 2(7) of the Interest Tax Act, 1974). Assessee's Contention: Supported the High Court's judgment that interest on government securities is not chargeable to tax under the Interest Tax Act. Relied on the Supreme Court's decision in Commissioner of Income Tax v. Corporation Bank. Revenue's Contention: Argued that the Tribunal and High Court erred in holding that loans and advances do not include interest on securities, bonds, and debentures, thus making them not liable to tax under the Interest Act. Contended that interest on securities falls within the definition of 'Interest chargeable to tax' under Section 2(7) of the Interest Act. Argued that the Supreme Court's decision in Commissioner of Income Tax v. Corporation Bank related only to interest on government securities.

Which sections of the Income-tax Act were involved?

Section 2(7),Section 260A,Section 24

AI-generated summary — verify with the full judgment below

THE COMMISSIONER OF INCOME TAX, II, TIRUCHIRAPALLI v. CITY UNION BANK LTD. (Civil Appeal No. 2690 of 2006) OCTOBER 13, 2008 [Dr. Arijit Pasayat and Dr. Mukundakam Sharma, JJ] The Judgment of the Court was delivered by DR. ARIJIT PASAYAT, J.

1.

Challenge in this appeal is to the judgment of final order passed by the Madras High Court in a group of appeals filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short the ‘Act’) read with Section 24 of the Interest Tax Act, 1974 (in short the ‘Interest Act’). Question involved was whether interest earned by the assessee bank on government securities was liable to be assessed under Section 2(7) of the Interest Act? The Income Tax Appellate Tribunal (in short the ‘Tribunal’) held that it was not chargeable. The High Court by the impugned judgment upheld the view of the Tribunal. The revenue filed the present appeal against the judgment of the High Court. It was submitted by learned counsel for the appellant that the Tribunal and the High Court were not justified in holding that loans and advances do not include interest on securities, bonds, debentures and therefore not liable to tax

The order continues below.

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